Vietnam Issues New Circular No. 05.
Legal News & Analysis - Asia Pacific - Vietnam - Energy & Project Finance
26 April, 2019
On 11 March 2019, the Ministry of Industry and Trade of Vietnam (MOIT) issued Circular No. 05, providing guidelines on the payment mechanism for energy output generated and exported from rooftop solar power projects to EVN's grids.1
On 8 January 2019, the Prime Minister of Vietnam issued Decision No. 02 revising the rooftop solar tariff scheme from the previous net-metering scheme to a new scheme involving separation between import and export power.2
Effective from 25 April 2019, Circular No. 05 provides a new model power purchase agreement (PPA) template for rooftop solar power projects, replacing the previous Circular No. 16's rooftop solar PPAs for implementing the new scheme of Decision No. 02 for rooftop solar. It also includes further clarifications on tariff payments for power exported from rooftop solar power systems to EVN's grids, invoicing and payment settlements, required timelines and obligations of rooftop power generators and EVN.
The new guidelines of Circular No. 05 are intended to resolve delays in EVN's execution of rooftop solar PPAs with rooftop solar generators from 2017, and to settle outstanding payments for excess energy output generated and exported from rooftop solar power projects to EVN's grids. Previously, tax issues were raised by EVN and governmental agencies as a key issue for Decision No. 02's changes made to the rooftop solar tariff scheme. Given that tax issues come under the remit of the Ministry of Finance, it remains unclear as to whether this Circular No. 05 of the MOIT can resolve these issues or whether additional specific guidelines on tax issues issued from the Ministry of Finance will be required.
Previously, under Official Letter No. 1337/EVN-KD of EVN dated 21 March 2018 sent to EVN's local power corporations regarding temporary guidelines for rooftop solar power projects/systems, EVN provided an instruction that:
For excess power output generated by generators to the grid systems of EVN's local power entities, the payment and finalization will be implemented after the Ministry of Finance (MOF) and the Ministry of Industry and Trade (MOIT) issue their new guidelines; and
The rooftop solar PPA will be officially signed between the power generator and EVN's relevant power entity after the MOF and the MOIT issues their new guidelines.
As a result of this confusion and subsequent delays, no payments are yet being made to most rooftop solar power generators for excess power exported to EVN's grids since 2017. Circular No. 05 may help make a significant step to finally release payments to rooftop solar power generators and Circular No. 05's new PPA is more simplified than the previous Circular No. 16's old PPAs for rooftop solar. However, it may only do so at the cost of new tax liabilities and higher retail tariffs applicable to the part of electricity imported from EVN's grids on the power they sell and buy, respectively, without the same level of commercial benefit of the previous net metering scheme.
Specific Rooftop Solar Tariff Scheme
Under Decision No. 02, rooftop solar power projects are entitled to a mechanism for purchase and sale of electricity that separates the direction of delivery of electricity from the direction of receipt of electricity in two way/ bidirectional meters, specifically:
Power generators (sellers) shall pay for any power received (consumed) and imported from EVN's power grids in accordance with the relevant existing regulations on retail tariffs with EVN.
The electricity buyer (i.e., EVN's local Power Corporations) shall pay for power generated and exported to EVN's power grids from rooftop solar power projects at the rooftop solar tariff as regulated by the MOIT.
To implement Decision No. 02, Circular No. 16 provides for the following clarifications in terms of the tariff for rooftop solar projects:
- Before 1 January 2018, the power tariff was VND 2,086 per kWh (excluding VAT, equivalent to 9.35 US cents per kWh, based on the central exchange rate of VND 22,316/USD announced by the State Bank of Vietnam on 10 April 2017);
- From 1 January 2018, the power tariff above will be adjusted in accordance to the VND-USD exchange rate fluctuation based on the central exchange rate of Vietnamese dong to US Dollars announced by the State Bank of Vietnam on the preceding year's last date of announcement of such exchange rate.
- The power tariff above will apply for a period of 20 years from the commercial operation date.
For the period from 1 July 2019, the tariff for rooftop solar projects may be revised so that it will be classified by solar irradiance regions across Vietnam (as we discussed in our earlier update here).
Timelines for reading meters and energy output
Circular No. 05 imposes the following timelines for reading meters and energy output exported to EVN's grid:
- Within 1 (one) working day from the date of reading meters, EVN as the power purchaser must notify the power seller on the meter readings and the rooftop solar system's power output generated onto EVN's grid.
- If the power seller disagrees with the details of the meter readings and output of power generated onto EVN's grid as notified by EVN, then the power seller is required to provide its feedback within 1 (one) working day from its receipt of EVN's notice.
- Upon expiration of the above time limit, if the power seller does not provide any feedback to EVN, then it will be deemed that the power seller has agreed with the meter readings and the power output generated to EVN's grid as notified by EVN.
Energy Payments and Billing Period
Under Circular No. 05, based on power output agreed by both parties and the power tariff as discussed above, EVN is required to make energy payments to the power seller for power exported on a monthly basis. Circular No. 05 provides for a specific formula for determination of the energy payments as well as a general implication of value-added tax (VAT) in this case.
In terms of timeline for EVN's payment, Circular No. 05 provides that it is within 7 (seven) working days from the date on which (i) the power seller agrees with EVN on meter readings and output of power generated and exported to EVN's grid (as notified by EVN) and (ii) a sufficient set of payment request and supporting documents must be submitted to EVN.
If EVN fails to make energy payment to the power seller within the above timeline, under Circular No. 05, EVN is required to pay late payment interest on the entire amount of late payments counting from the date preceding the due date until the date on which EVN makes actual payment. The late payment interest is calculated based on a 1-month average interbank interest rate as announced by the State Bank of Vietnam at the time of EVN's payment.
Vietnam rooftop solar market potentials
A related report of the MOIT to the Prime Minister on 21 February 2019, provides some perspective about the potentials for rooftop solar power in Vietnam.
Cities in the central and Southern regions of Vietnam have great potential for rooftop solar power investments.
According to a study on assessment of rooftop power potentials made by the MOIT in cooperation with The World Bank in 2017,
- In Ho Chi Minh City of Vietnam, its urban zones have around 316,535 buildings that have a total area of approximately 50.4 million m2 of rooftop with potential for solar power generation and a total capacity of 6,380 MWp (equivalent to 17.9 million MWh per year). For suburban zones, they have a preliminarily estimated potential of around 29,000 MWp for rooftop solar power.
- In Da Nang City, its urban zones have around 148,882 buildings that have a total area of 9.15 million m2 of rooftop with potential for solar power generation and a total capacity of approximately 1,140 MWp (equivalent to 3.23 million MWh per year). For suburban zones, they have a preliminarily estimated potential of around 1,000 MWp for rooftop solar power.
Increase on EVN Retail Tariffs and Impacts on Rooftop Solar
On 6 March 2019, the MOIT issued a press release on its website regarding its plan to increase the retail tariffs by an average 8.36%. On 20 March 2019, the MOIT issued an official decision to specify the new average retail power tariff level of VND1.864.44 per kWh (exclusive of VAT) as well as the new retail tariff rates for application from 20 March 2019.3
Accordingly, the retail electricity tariff structures and allocations vary between different types of customers (industrial, commercial and household / residential), voltages and time-of-use (peak, normal and off-peak hours). This decision of the MOIT on increased retarill tariffs making these allocations in this respect will have variable impacts on rooftop solar generators and consumers.
From the commercial and industrial rooftop solar generators' perspectives, they may expect a quicker movement towards market-based pricing mechanism to better reflect real costs and justify capital investments needed.
From the consumers' perspective, it remains to be seen what will be the approved rate of increases and how they will be allocated across different types of customers (industrial, commercial and household / residential).
From the household rooftop generators' perspective for self-consumption purposes, so long as EVN continues to charge them for the energy they consume from EVN under retail tariffs, without paying for what they export, they threaten to make household rooftop solar power investments a "heads you lose, tails they win" situation. To make things worse, just as EVN seems prepared to finally start paying for energy generated, new tax liabilities may be imposed and the price paid on the consumers' side to EVN will go up.
Please note that Decision No. 02 and Circular No. 05 amend the previous Decision No. 11 and Circular No. 16 from 2017 applicable to the first feed-intariff program of Vietnam which expires on 30 June 2019. These are separate from the next legal framework for the upcoming 2nd FiT program from 1 July 2019 which is currently still in draft form.
Having said that, except for the differences in tariff rates, for the terms of the new PPA for rooftop solar, the MOIT may consider to continue, inherit or adopt its application for one or more rooftop solar models through the next feed-in-tariff program from 1 July 2019. For updates on the 2nd FiT program for solar power for application from 1 July 2019, please refer to our separate updates.
Please also note that Circular No. 05's new model PPA only governs the part of rooftop solar energy output for sale to EVN, but does not cover other rooftop solar business models (e.g., direct PPA model or equipment lease agreement model for rooftop solar power generators' direct sale to consumers, etc.).
Please do not hesitate to contact us if you would like to discuss rooftop solar business models and issues in further detail or any other relevant topics, including, among others:
- Circular No. 05's further details on specific formula for determination of the energy payments or implications of value-added tax (VAT) for rooftop solar projects or next step for settlement of energy payments with EVN;
- legal analysis on feasibility and implications for different solar business models, the likelihood and scope of upcoming additional guidelines and potential revisions of the 2nd FiT program from 1 July 2019;
- how to localize and design rooftop solar contractual arrangements in line with Vietnamese legal systems on electricity and solar energy; or
- full details on retail electricity tariff structures and allocations for different types of customers (industrial, commercial and household / residential), voltages and time-of-use (peak, normal and off-peak hours) for application from 20 March 2019; or
- specific opportunities for investment in solar power or other renewable power projects in Vietnam.
For further information, please contact:
1 Circular No. 05/2019/TT-BCT of the Ministry of Industry and Trade dated 11 March 2019 (Circular No. 05") amending and supplementing a number of articles of Circular No. 16/2017/TT-BCT of the Ministry of Industry and Trade dated 12 September 2017 on project development and model power purchase agreements for solar power projects ("Circular No. 16").
2 Decision No. 02/2019/QD-TTg of the Prime Minister dated 8 January 2019 ("Decision No. 02") amending and supplementing a number of articles of Decision No. 11/2017/QD-TTg of the Prime Minister dated 11 April 2017 on the mechanism for encouragement of the development of solar power projects in Vietnam ("Decision No. 11").
3 See: http://www.moit.gov.vn/web/guest/tin-chi-tiet/-/chi-tiet/gia-%C4%91ien-chinh-thuc-tang-them-144-%C4%91ong-kwh-tu-hom-nay-14231-22.html; and http://www.moit.gov.vn/web/guest/tin-chi-tiet/-/chi-tiet/gia-%C4%91ien-cua-viet-nam-nam-2018-thap-nhat-trong-25-nuoc-%C4%91uoc-khao-sat-14125-16.html (updated on 6 and 20 March 2019 and last accessed on 21 March 2019).